Conde Nast Portfolio ran a fantastic profile by David Margolick on Schultz in the July issue. In fact, his celebrity has generated a lot of press. Some other articles I’ve seen recently include an explanation of Starbucks’ store closing strategy in Slate, and a preview of their new Clover coffee maker in Wired.

The original Starbucks story is a brilliant tale of outrageous success. CEO Howard Schultz started with coffee - an addictive product. Then he created a market for espresso-based drinks at premium pricing. The company systematically expanded into high-income locales in the US and beyond. Starbucks created an aspirational brand that was strong enough to cross over into the music business. It all fit into the lifestyle they were selling: Upscale, urban, hip, and epicurean.

Overview

When recession hit, expansion slowed, and same-store sales dropped. Even worse, the stock was down 40% and the brand was in trouble. David Margolick quotes an anonymous blog contributor:

” . . . the place has become the McDonald’s of the industry, with worse coffee than McDonald’s itself.”

Schultz’s problem is that he needs to make the Starbucks experience so good that people are happy to pay $4 instead of $1.50 for a cup of traditional coffee. In a recession.

Report Card

Customer Service: A-

The first thing he did was announce a Starbucks Nationwide Training Day on February 26^th. Every Starbucks in the country shut down for 3 ½ hours to retrain staff on the customer experience, including refresher courses on how to make individualized drinks.

Smart move. To begin with it was a PR bonanza. One thing Starbucks has going for it is people love customized drinks. Loyal customers express their individuality through their unique choice of beverage.

The blog Starbucks Gossip even has a page on what drinks celebrities order (Nicole Kidman gets a grande cup of nonfat foam. Just the foam!) People will spend a little more to feel special, and you’d better get their drink order exactly right

Starbucks also beefed up customer outreach. They’ve set up a Card Rewards club when you register your Starbucks card. You get special bonuses: the occasional free drink offer; free refills of coffee in stores; and free flavor shots (does not apply to mocha).

Most interestingly, perhaps, baristas were also told to make more conversation with customers. To kill two birds with one stone, Starbucks will be rolling out new swiss-made espresso machines that are lower. This means baristas can make eye contact with customers while making their drinks.

Improving the Coffee: B

To paraphrase McDonald’s Ray Kroc, they’re not in the coffee business; they’re in the real estate business. Starbucks packaged the sophistication of the Italian café and marketed it by putting one on every corner. Sometimes they put two on a corner. So why are they focusing on the coffee?

Business category aside, here’s what Schultz is doing to improve the coffee. First, there’s that swiss espresso machine. Maybe it’ll be better, although they say most of the espresso making process is now automated anyway.

Second, changes are happening in the area of drip coffee. I agree that the blogger’s comment about McDonald’s having better coffee than Starbucks is true. Their coffee has always been way too bitter. But now they’ve introduced a new blend called Pike Place Roast, named after Starbucks’ flagship store in Seattle. They have it in both regular and decaf, and it’s pretty good.

Drip coffee is cheaper than espresso drinks though, and it will hurt their bottom line. Part of Starbucks’ genius was getting people to pay premium prices for fancy coffee drinks they can’t make at home. Shifting sales volume to a less expensive product is risky. It may keep some clients around during a recession, but in the long run it’s going to hurt revenues. Enter the Clover.

Third, there is a new and fascinating piece of coffeemaking technology coming to Starbucks:The clover. It promises to give coffee the artisanal appeal of single malt scotch and single origin chocolate. It’s a coffee brewing machine that makes one cup at a time, and it gives precise control of three key variables of coffeemaking: dose, temperature, and brewtime. Combine that with top-shelf gourmet beans and descriptions like chocolate, fruity, rose, spices - enter the lexicon of coffee. Schultz liked the technology so much he bought the company, and when it arrives he’ll have a fancy cup of coffee that costs $4 a pop, just like a latte.

Stirring Up New Drinks: C+

During Margolick’s interview, Schultz was obsessed with a drink in development with the code name Project Ferrari. It’s now in stores and it’s called Vivanno. It’s basically a smoothie made with fresh fruit, and it comes in two flavors - Banana Chocolate, and Orange Mango Banana. They’re mediocre smoothies. Well, the Banana Chocolate tastes really good with a shot of espresso. They ought to sell it only with the espresso, because Starbucks can’t afford to have mediocrity on the menu.

Why Vivanno? Schultz has a significant stake in Jamba juice, and maybe he senses smoothies are making inroads into the premium drink market. I think he’s way too close to the smoothie world to be objective on this. Yes, he’s had huge success with the Frappuccino. People like it, but I think it dilutes the brand. Maybe people will go for the Vivanno, but I think it’s a loser.

Cost Cutting: C

I can’t argue with holding back expansion and closing underperforming stores. They grew so vastly, there were sure to be some poor locations in the mix. By now they’ve covered every single upscale locale, at least in this country.

But gutting the music division is a big mistake. They’ve cut it from 40 employees to 12.

I have no idea how many units they move, but seeing CDs in the store made waits tolerable, even interesting. Having its own soundtrack in the store and even a satellite radio channel makes Starbucks a lifestyle choice. They may have gone overboard creating their own record label, but Starbucks always makes the right music choices.

Remaking the Brand: B

Starbucks is selectively using its original brown mermaid logo again, with the special Pike Place blend cups. She’s got the bare breasts that were bowdlerized in the newer green corporate logo, and it brings back a little street cred for people in the know.

Overall Grade: A

It’s hard to see how all of this adds up to an A, but that’s because it’s all about the intangibles. So many of the initiatives improve brand equity that even if customers don’t benefit directly from the changes, there’s an aspirational quality that they’ll appreciate. The vast majority cares only about caffeine and doesn’t give a damn about artisanal coffee. And why would anyone want to talk to their barista when they’re bleary-eyed early in the early morning?

But when you put it all together, you get a lot of news coverage and the sense you’re a part of a rennaisance. They’re reviving the cachet of the Starbucks experience, and people will pay $4 a cup for the privilege of feeling sophisticated.

I’d give them an A+ if they hadn’t gutted the music division.